Length of Credit History
Five different factors affect your credit score, and your length of credit history is right in the middle in terms of impact, behind payment history and credit utilization.
The idea behind credit history is that the longer you use credit, the more information lenders will have to determine your creditworthiness. What’s more, using credit over time could help you establish better credit habits.
Length of credit history vs. credit age
According to FICO, the length of your credit history incorporates three elements, including:
- How long your credit accounts have been open.
- How long specific accounts have been open.
- How long it’s been since you’ve used your credit accounts.
Your credit age is a specific calculation credit scoring companies use to help determine your length of credit history. More specifically, they’ll take an average of how long all of your credit accounts have been open. The higher your credit age, the better it is for your credit score.
How is the length of your credit history calculated?
It’s impossible to say exactly how your credit history impacts your credit score because there are many other factors that come into play. But if you’re hoping to improve your length of credit history, there are a couple of calculations the credit scoring models use you should consider.
The first is the age of your oldest account. You can find this by reviewing your credit report and looking for the oldest account you have.
The second is your average age of accounts. Let’s say you have three credit cards:
- Card A was opened 15 years ago.
- Card B was opened 5 years ago.
- Card C was opened 4 years ago.
To get the average age of these accounts, you’ll add up the ages of each and divide that figure by the number of cards you have. In this scenario, that average is eight years; (15 years + 5 years + 4 years) = 24 years / 3 cards = 8 years average age.
Now, if you were to open a fourth credit card, which would have an age of zero years, your average age of accounts would drop to six years; 24 years / 4 cards = 6 years average age
It is important to remember that your length of credit history also considers how long specific accounts have been open and how long it’s been since your credit accounts have been used. Unfortunately, FICO doesn’t publicly provide the calculation for these factors and how they impact your credit score.
How does length of credit history affect your FICO score?
Your length of credit history makes up 15% of your FICO score. That may not seem like a lot, but it can still have a significant impact on whether or not you qualify for a loan.
This is particularly true for people who are new to credit. If you have a thin credit file, lenders have less information they can use to determine how well you manage your credit accounts and the likelihood that you’ll default.
That said, a low average age of accounts can also make it difficult to get access to credit, even if you’ve been using credit for years.
That’s because a low average age of accounts indicates that you apply for credit regularly, which could signal that you’re having trouble managing your money without the help of credit. Also, the more credit accounts you have open, the more monthly payments you have. Spreading your budget thin could make it more challenging to keep up with payments on a new credit account.
How to improve your credit history
In general, the best way to improve your length of credit history is to be patient. As you manage your credit accounts responsibly over time, your credit history will improve naturally. However, there are some other specific steps you can take to be more effective in your efforts.
Don’t Cancel Your Credit Cards
Resist the urge to cancel old credit cards, even if you no longer use them. The longer the account stays open, the better it will be for your FICO score.
Of course, there may be some exceptions to this piece of advice. For example, if you’ve had significant trouble with overspending, the benefits of keeping the account open may not outweigh the costs of credit card debt.
You may also wonder if holding onto an account with an annual fee or a security deposit is worth it. Before you close the account, consider asking if you can downgrade it to a card with no annual fee, so you can keep the account open and fee-free. The same goes for secured credit cards — see if there’s any way you can have your deposit returned without closing it.
If there are no solutions, however, closing the account to avoid an annual charge or to get your security deposit back may be the better choice.
Make sure your accounts stay active
Keeping your credit accounts active isn’t just important for your FICO score. It also keeps your creditors from closing your accounts for inactivity.
One way to keep your accounts active is to use them regularly. But if you have an old credit card that doesn’t offer as many benefits or rewards as a new one, consider using the card for a single recurring charge — say, a streaming service or your phone bill — and set up automatic payments, so you don’t have to remember to pay the bill manually every month.
Start building your credit history now
The sooner you start building your credit history, the better it will be for your FICO score in the long run. If you’re a college student, you may consider opening a student credit card and using it for everyday expenses, then paying it on time and in full every month to build good credit and avoid interest charges.
If you’re not a college student, a secured credit card can provide the same benefits, though you’ll need to make an upfront security deposit to get approved — the minimum is often $200 to $300, and the deposit will be equal to your credit limit. Just be sure to avoid a high credit utilization.
A non-credit card alternative, which can be good for students and non-students alike, is a credit builder loan. This is a type of installment loan designed specifically to help people with limited or bad credit histories to build their credit.
Unlike a traditional loan, though, when you apply, the lender holds onto the money until you’ve made your final payment, sometimes with interest. Each payment goes toward paying for the loan and its interest charges and will help improve your FICO score.
Things that could hurt your length of credit history
While you’re working on building your credit history, there are a couple of things to watch out for that can hinder your progress.
Opening multiple credit cards
It may be tempting to open several credit cards to get sign-up bonuses and various perks. But with each new account, your average age of accounts will go down.
This may not make a huge difference if you’ve been using credit for several years. But if you’re brand new to credit, you may be better off sticking to one or two accounts while you establish a positive history.
Closing credit cards unnecessarily
In some cases, closing a credit account occurs naturally. Once you’ve paid off your auto loan or student loans, for instance, the lender will report to the credit bureaus that you’ve satisfied the initial agreement and close the account.
But when it comes to credit cards, you can generally keep the account open as long as you want. Of course, there are some potential reasons for closing an account despite the credit benefits of keeping it open, but try to avoid closing credit card accounts that aren’t harming you in other ways — and take steps to keep them active.
Considerations for Getting a Credit Builder Loan
There is one potential pitfall if you’re considering getting a credit builder loan.
If the loan that you get has too short of a term, it could hurt your length of credit history. For example, only getting a 12-month credit builder account could hurt your credit score by lowering your average credit account length.
Most credit builder loans have terms of just 12 to 24 months.
A Credit Strong credit builder loan gives you the option to obtain an account that can build up to 120 months of payment history, 10 times the length of credit history of a ‘typical’ credit builder loan. The long repayment period gives you a great tool to improve your length of credit history.
No other credit builder loan on the market offers this long of a repayment term timeline.
Best of all, Credit Strong accounts have no prepayment penalty or early withdrawal fees, so you can cancel the account at any time for free if your personal financial circumstances change unexpectedly. The lowest plan starts at just $15 per month, so it’s affordable for anyone who wants to build their credit.
The bottom line
Your length of credit history isn’t the most important factor in your FICO score, but it can have a significant impact on your ability to obtain credit when you need it. As you work to build good credit overall, make sure you’re working to establish a robust length of history.
Steps include starting as soon as possible, keeping credit accounts open and active and avoiding opening multiple accounts, especially in a short period of time.
And remember, while your length of credit history is important, your payment history and credit utilization are even more influential, so make sure you’re focusing on those as well in your efforts.